Health savings accounts: bringing savings and choice to the health insurance landscape.

As most small business owners know, they would rather be running their business than running their health plan. After all, while important to employee wellbeing, paying for and managing health benefits are resource and energy intensive and take away from bringing in new business and revenue for the company.

But a new provision in the Medicare prescription drug law passed by Congress in late 2003 is starting to take hold in the California group insurance market for small businesses. And this may very well be worth a look by small business employers and their employees.

Allowing people to set aside pretax income to pay medical costs, the provision created Health Savings Accounts (HSA's) that when combined with high-deductible health plans (HDHP), can significantly lower both the overall cost to employers and employees for health insurance.

A significant portion of small businesses with 50 or fewer employees do not offer health insurance to their employees. The HDHP/HSA combination can offer savings for companies already offering health insurance, and may allow small businesses that do not currently provide health insurance to start an employee benefits program. As an example, with the HDHP/HSA combination, employers who in the past paid monthly premiums of $1,000 per employee for coverage can now pay $300-400 toward plan costs, and this covers 100% of the employee premium.

The advantage of high deductibles is that they provide affordable premiums. And, with companies that offer these plans potentially paying some--or all--of the premiums as well as having the employer and employee able to contribute to the savings accounts, a tax-deductible account similar to an individual retirement account is created for the employee.

"While some people are worried about the high deductible costs to employees", says John Grgurina, President of PacAdvantage, a nonprofit company specializing in offering health insurance choice to companies 50 or smaller, "others see it as a great way to provide incentive for employees to help better manage health costs overall. And, the effective use of health savings accounts can actually reduce total out-of-pocket costs an employee may incur when compared to coverage they may already have."

Generally, to qualify, the HDHP must have a deductible of at least $1,000 to be eligible for a companion health savings account. Employees, and/or the employers making contributions on the employees behalf, make tax-free .contributions to the HSA up to the insurance plan deductible (maximum deductibles for this year are $2,600 for an individual and $5,150 for a family).

When the insurance policy deductible is higher than what can be placed into the HSA account, the difference in cost is the employee's responsibility. However, to prevent financial disaster for the employee, the out-of-pocket maximum is capped at $5,000 for an individual and $10,000 for families. So, assuming no catastrophic medical needs, over time it is possible for the employee to build a savings account for medical expenses that will support future expenditures and effectively eliminate any difference between the deductible amount and the amount contributed in any one year. That account can continue to build, like an I.R.A. If the employee withdraws money from this account for something other than health care, taxes and penalties must be paid. However, at age 65, the employee can withdraw money to pay for health care without taxes or penalty. And if used for something other than healthcare after age 65, the money is only taxed and no penalty is incurred.

"These plans are a great tool for many employers and their employees", says Grgurina, "and while they can provide great cost savings, they aren't necessarily for everyone. This leads directly to the appeal of a company like ours that offers choice of plans and carriers to the employees. Those individuals who want the HSA-compatible plans can get it, while others can select the more traditional PPO and HMO plans".

There are companies out there that specialize in the administration of HSA plans and simplify the process for both the employer and employee. The introduction of bank debit cards is one way these plans continue to be simplified. Plans that incorporate choice and offer employees limited financial responsibility can ease the way to lower premiums. The insurance broker is a good resource for additional information. Rather than being a passing fad, consumer-directed healthcare could play an important role in incorporating financial planning and consumer choice into our ideas of traditional health insurance.

"We understand employers want to offer their employees benefits that are meaningful ... on a personal level." says Grgurina, "And with trends showing employees will be carrying more and more of the cost of healthcare, as evidenced by examples like the HSA combinations being talked about here, we see the need for choice as growing to be a dominant consideration as consumerism decision making further enters healthcare. We believe smart companies are developing strategies to meet these changes."

Information for this article was provided by PacAdvantage, which has representation throughout the state of California, and can be contacted at 877-735-5742 or via their website at www.pacadvantage.org.